UK Economy Improving – BoE

By Tom Higham

24th October, 2013

Bank of England Minutes Show Positive Signs for UK

The Bank of England (BoE) minutes released yesterday has indicated that, as we had thought, the UK economy is improving. The minutes revealed that a number of sectors of the economy are improving at a faster pace than previously expected, it also confirmed that the Central Bank voted unanimously for interest rates to be kept on hold and also hinted that they are likely to remain at these low levels over the course of the next year. Currently UK unemployment is at 7.7% and the Bank has stated that for interest rates to be raised they will need to see unemployment fall below 7% and while previously the BoE had thought this would take in the region of 3 years the latest set of minutes mentioned that this may now be much sooner. Theoretically the possibility of an interest rate hike is seen as a good thing for that economies currency as it should mean with a higher return that currency is in more demand and therefore becomes more valuable. For example, back in January 2007 interest rates were raised to 5.25% which as a result pushed Sterling up to over 1.50 against the Euro! Now, while these days seem like a very very long time ago it does highlight just what can happen when interest rates change. While an interest rate rise is still some way off I would not be surprised if the closer unemployment gets to 7% the more likely we are to see the Pound strengthen. This may still be another year off but the minutes have provided us with some hope that we are definitely moving in the right direction.

Despite this positive news Sterling fell against the Euro yesterday but conversely strengthened against the US Dollar which just goes to show how unpredictable the currency market can be! Part of the reason we saw GBP fall against EUR was that the European Central Bank (ECB) announced that the European banks will have to face stress tests next year. These stress tests have provided some confidence that the ECB will provide greater governance over the banking sector and could mean that any banks with a capital shortfall will be required to increase their levels of capital to help protect themselves from a Norther Rock, Lehman Brothers style collapse. While the European banks, especially the Spanish came under significant pressure during the recession the fact that they will have stricter controls imposed upon them should reduce the risk and therefore has generated some positivity for the Euro. However, the results of these stress tests will make interesting reading, should any of the banks show signs of weakness but with the tests not until next year there should be plenty of time for the banks to get their balance sheets in order…

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